The Voice (Francistown)
29 April 2008
column
Francistown — I suspect that headline will pull in a few extra readers this week.
That's because most of us would love to be able to just snap our fingers and turn our modest savings into the kind of serious money that would allow us to live well now and retire in comfort while we're still young enough to enjoy the free time.
The magic I'm going to tell you about, however, isn't anything new. It's called compounding and it is a simple way to make your money appreciate in value, but it is a concept that does not seem to be fully appreciated by many of us. Let me try to explain the power of compounding by asking you a question: If you were offered a choice between P100,000 or one thebe that would be double every day for a month, which would you go for?
I think a lot of us wouldn't even bother to work out what that thebe would be worth after 30 days and would grab the cash as fast as possible. That would be a huge mistake. After five days of doubling 1t would be worth 16t. At 15 days, or half-way through the month, you would have P163.84 and the P100,000 would still be looking pretty good, but the real magic of doubling your money takes place later on.
By Day 25 the thebe would have doubled enough times to give you P167,000. The next day it would be P335,000 and the next it would be over P670,000 - and you would still have three days left. By the end of 30 days, that one thebe would be worth more than P5 million.
Hard to believe, but you can check it for yourself on the following chart:
1. 1 x 1t = 1t 11. 2 x P5.12 = P10.24 21. 2 x P5242.88 = P10,485.76
2. 2 x 1t = 2t 12. 2 x P10.24 = P20.48 22. 2 x P10,485.76 = P20,971.52
3. 2 x 2 t= 4t 13. 2 x P20.48 = P40.96 23. 2 x P20,971.52 = P41,943.04
4. 2 x 4t= 8t 14. 2 x P40.96 = P81.92 24. 2 x P41,943.04 = P83,886.08
5. 2 x 8t = 16t 15. 2 x P81.92 = P163.84 25. 2 x P83,886.08 = P167,772.16
6. 2 x 16t = 32t 16. 2 x P163.84 = P327.68 26. 2 x P167,772.16 = P335,544.32
7. 2 x 32t = 64t 17. 2 x P327.68 = P655.36 27. 2 x P335,544.32 = P671,088.64
8. 2 x 64t = P1.28 18. 2 x P655.36 = P1310.72 28. 2 x P671,088.64 = P1,342,177.28
9. 2 x P1.28 = P2.56 19. 2 x P1310.72 = P2621.44 29. 2 x P1,342,177.28 = P2,684,354.56
10. 2 x P2.56 = P5.12 20. 2 x P2621.44 = P5242.88 30. 2 x P2,684,354.56 = P5,368,709.12
Okay, you say, so where can I double my money every day for a month?
Well, I don't have an answer to that one, but I do know that if you put money into a savings account at 10 percent interest it will double in every 7.2 years, and if you can get 12 percent interest, it will double every six years.
It is also very important to note that a little money put away when you are relatively young is often worth more after it has been compounded than a lot of money invested later in life. Here's an example: Maggie and John are college graduates who start working for the same company when they are 22-years-old. Maggie understands the power of compounding so even though money is tight, she invests P1000 a year at 10 percent interest for every year until she is 30. At that point she leaves work to become a full-time mum. Her total investment is P8000. John, meanwhile, doesn't start investing until he is 30, but he puts away P1000 at 10 percent every year for 35 years until he retires. That's a total investment of P35,000. So when they are both 65, which one do you think will have more in the bank?
Believe it or not, Maggie who only invested P8000 will have P388,865 while John who paid in P35,000 will have P329,039.
The message should be clear. If you want to have a reasonable nest egg when you retire, take advantage of the doubling effect of compounding and start saving when you are young.
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